California's two massive state university systems may be in a better position than most of their higher education peers to face the financial dislocations caused by the coronavirus.
California State University and the University of California were faring pretty well heading into the pandemic, but now face unanticipated challenges from a budget crunch created by the additional costs associated with online instruction and the loss of revenue from housing and activities fees.
All three rating agencies assigned negative outlooks to the higher education sector even before the pandemic struck.
“The negative outlook reflects our belief that all projects in the sector are facing negative economic or fundamental business conditions that could result in lower ratings over the next one-two years,” S&P analysts wrote in March. “In addition, the negative outlook reflects expected challenges facing the industry due to a sudden and potentially prolonged decline in student housing occupancy and associated loss of rental revenue, as many colleges and universities have moved to remote learning.”
Their analysts say that CSU and UC are positioned better than most, despite the cuts proposed by California Gov. Gavin Newsom in his post-coronavirus budget proposal.
“The credit quality of both institutions has been very stable; each has maintained its ratings through different challenges,” said Mary Ellen Wriedt, a director in S&P Global Rating’s San Francisco office.
UC holds an AA issuer default rating from Fitch Ratings with a stable outlook; an Aa2 rating with a positive outlook from Moody’s Investors Service and AA rating with a stable outlook from S&P. CSU holds an Aa2 rating with a stable outlook from Moody’s and AA-minus rating with a stable outlook from S&P. Fitch doesn’t rate CSU.
Newsom cut funding to the systems from what he proposed in his original pre-pandemic $222.2 billion January budget.
The cuts included the withdrawal of increased funding to both UC and CSU. Deleted from the original plan are $169.2 million in planned funding increases to UC and $205 million for CSU.
The governor's cuts also included a 10% decrease in funding to both state university systems totaling $376.4 million for UC and $404 million for CSU. The 10% cuts could be restored depending on how much if any future coronavirus aid the state receives from the federal government, according to the May budget revision.
Newsom did extend a life raft to UC and CSU by allowing them to “use restricted fund balances, except lottery balances, to address COVID-19 related impacts and the loss of revenue from university enterprise functions, according to the governor’s revised budget. Additionally, the Administration will pursue statutory changes authorizing the UC to temporarily use the savings from the refinancing of specified debt to address COVID-19 related impacts and revenue losses."
Unlike other universities, the massive UC and CSU systems were able to recover from the 2008 recession, and had been successfully dealing with competition from online universities and the myriad of other pressures facing universities before the pandemic, according to rating analysts.
“State appropriations [to UC and CSU] have grown since 2008,” Wriedt said. “The management of both CSU and UC are both very good. They reacted to, and managed through the cuts from 2009 to 2009. Both systems are good at crisis management.”
Both systems face considerable challenges, from both pre-pandemic and post and from pandemic pressures.
CSU is among universities nationwide facing class action lawsuits from students who want to be reimbursed for services they have been unable to use.
CSU announced in a voluntary disclosure posted on the Municipal Securities Rulemaking Board’s EMMA website on May 21 that a lawsuit, Miller v. Board of Trustees of the California State University had been filed April 27 in the U.S. District Court. The plaintiff seeks to bring a “class action on behalf of all people having paid student fees in the spring 2020 semester at any of the 23 CSU campuses,” according to the disclosure filing.
S&P had a negative outlook on the higher education sector for three years prior to the coronavirus outbreak driven by enrollment pressures, the decline in high school demographics, and affordability pressures from rising tuition, said Jessica Wood, an S&P senior director.
On April 30, S&P revised 120 on 450 of the university’s it rates to negative, but UC and CSU retained their stable outlooks, Wood said.
UC chancellor Janet Napolitano’s plans to retire won’t change S&P’s view of the system as having strong management, Wriedt said, because it will probably pick someone of similar caliber.
Timothy White, CSU’s chancellor, who was also set to retire this year, has decided to put off his own plans to retire in order to “see the university through this crisis,” according to a statement.
CSU, which serves 410,000 undergraduate students across 23 campuses, is the largest university system that S&P rates in the country, Wood said.
UC, which educates a combined 280,000 students in its undergraduate and graduate programs, has its own unique characteristics that shelter its finances somewhat from the current crisis.
With five hospitals spread throughout its 10 campuses statewide, UC not only qualifies for CARES Act funding in the higher ed pot, but also for funding earmarked for hospitals and research, Wriedt said. It also has a large number of international students, who pay the full out-of-state tuition rate, said Emily Wadhwani, a Fitch Ratings director.
“The state universities are oversubscribed, and there is a healthy perspective from the demand side,” Wadhwani said. “They are high quality institutions with great student outcomes. They come into this current crisis, the pandemic, from a position of relative strength.”
The universities, particularly UC, have done well on the international front, Wadhwani said.
“They have maintained a steady level of international students even with nationwide declines,” she said, though that could present a challenge with restrictions on international travel amid the pandemic.
A challenge in California is that the strength of public employee unions restricts the ability to make meaningful changes from a staffing perspective, Wadhwani said.
So far, analysts say, federal funding has not been enough to cover expenses associated with the pandemic or stem revenue losses from the switch to online teaching. Analysts say that the university systems may have to lay people off.
UC and CSU are expected to receive $260 million and $525 million, respectively from the federal CARES Act. The Act dictates that the universities expend ‘half of the higher education funds to provide emergency grants to students,” according to the governor’s revised budget.
Given the continued low interest rate environment, one way the system’s finance teams might save money is through further refundings, analysts said.
They could also postpone capital projects that are not already underway, but Wadhwani said, she doesn’t “see the universities canceling projects where they already have shovels in the ground.”
Though additional loss of revenues is expected, particularly from activity fees and student housing in the coming school year, UC and CSU are expected to weather the storm.
A few weeks ago, White said that CSU classes will be held online in the fall. UC has not revealed its plans.
“They have done admirably so far,” Wadhwani said. “They are all trying hard to manage students’ and the student’s families expectations, because there aren’t great answers. They are working with experts, right and left, to figure out how to reopen in as safe a manner as they can.”
